What Startups need to succeed in IoT ?

During last 2-3 years a new crop of entrepreneurs have entered the fray in the Internet of Things (IoT) space, thanks maybe to projects funded by EU and multitude of Public and Private Business Accelerators and Project Incubators, but especially since IoT has become the buzzword of 2014, should not surprise us that IoT market is capturing the attention of many new startups, startups accelerator, entrepreneurs, investors and all kinds of wildlife (in the best sense of the word) that attempt to take part of the big cake promised by analysts like Analysis Mason, Machina Research,… or companies like Ericsson or Cisco.

More information about estimations and predictions in this post and this slideshare.

A brilliant future for IoT entrepreneurs and startups

Clearly has been a before and after Google announced last January that it entered into an agreement to acquire Nest Labs, the maker of high-tech thermostats and smoke detectors, for $3.2 billion. Without any doubt this acquisition has changed the way Universities teams, companies’ labs, hardware designers, software programmer, entrepreneurs and investors approach to IoT. The money is flowing around the world because no one wants to miss this orgy of wealth that will generate the IoT.

According with Peter Sondergaard, senior vice president at Gartner and global head of research, “The incremental revenue generated by the Internet of Things’ suppliers is estimated to reach $309 billion per year by 2020.This growth opens up new business opportunities, as half will be attributed to new startups and 80 percent will be in services, not products”. According with Mr. Sondergaard, industries leading the digitalization of everything are manufacturing (15 percent), health care (15 percent) and insurance (11 percent).

The future of the “Internet of Things” (IoT) is more open than ever for entrepreneurs or startups thinking about getting into the market. The fact that companies like General Electric, Cisco, IBM, Oracle, SAP, Apple, Google, Microsoft, Samsung and many others are announcing their IoT/M2M strategies for consumer and enterprises and the need they have to add their portfolios IoT products and services are good news for IoT startups.

What are the main challenges face IoT entrepreneur and startups?

Assuming that entrepreneurs and startups have the tenacity to overcome the most significant challenges that any startup is facing today:

Funding

Misunderstanding the Market

Cash Flow Problems

Creating the Right Culture – Recruit and keep rock star talent.

Ability to bring on additional staff.

There is some challenges specific for IoT.

In the consumer space, many of the new startups founded by young Hardware and Software engineers are building disruptive, innovative connected devices but there is not a common approach in terms of business models. Consumers do not yet fully understand what they are looking for, or looking at. As a consequence, investors are hesitant to invest in markets that are not yet fully understood.

While prototyping connected devices is becoming increasingly easy thanks to open hardware like Arduino and RaspberryPi and IoT-focused cloud computing platforms, making the move from prototype to large-scale manufacturing is still a huge challenge.

In the enterprise space, the kings of new startups are mainly developing new hardware for vertical industries like Healthcare, Utilities or general Remote Asset Management. But there are many other startups companies in different categories:

M2M/IoT Operators

M2M/IoT Device Management platforms

M2M/IoT Application Development platforms

M2M/IoT Security

M2M/IoT Service Providers

IoT Consulting and System Integrators

In this case founders are industry veterans with technical background and sometime business experience.

The main challenges are: find the right business model and absence of standards.

An Enabler for IoT Startups

Of the thousands startups born during the 90’s with the PC software and hardware business, or during the Internet bubble at the end of the last century and more recently with the boom of social media only a few were able to create new business models. But thanks to companies like Microsoft, Apple, Cisco, Oracle, Dell, Amazon, Google, Twitter or Facebook, to name a few, many other startups under their rule have become successful SME (Small and Medium Enterprises) providing the innovation that the Biggets can not do it.

We do not have in IoT, at this time, any dominant company and while all of the above companies are looking to be the reference in the IoT world. I am convinced that there will be none of them who will be remembered in 20 years for being a monopoly (leader) in IoT. I do not want you think these words meaning that these companies will not make profit of the billions of connected objects. They will. But the transformation that these companies need to do to be competitive and innovate in new IoT services will collide with their traditional IT business so will make they move slowly and they lose against new entrants that are not linked with old IT stuff.

I am very interested in see which company will dictate the rules for IoT and how new startups will be created under its umbrella. Nowadays many startups are reinventing the wheel, they are working with the principles of Internet startups and they are not looking at the market what are their needs. Is not about more technology, its about consumer and enterprise services enabled by IoT.

How many startups based on Google tools are running profitable business today?, or how many new startups are developing applications for take advantage of Facebook´s billions of people sharing their lives and are growing in new business that did not exist before. I am afraid that untila few years from now we will not see startups in the IoT space that can take advantage of a leader Sensor Global Provider that allow them create on top of their Sensor as a Service Platform innovative services that can be monetized.

But backto reality, a few days ago, Cisco announced an initiative with Internet of Things for Entrepreneurs”. I register in a similar local initiative in Spain, but after reading the conditions to participate in the program I leave. I do not expect the most brilliants ideas want to be share with this Giant if the conditions are the same.

I have been talking with many IoT startups, entrepreneurs and some Investors during the last months and till now I did not find the company with the disruptive business model or product or service that will leverage the IoT revolution that we all expect.

What crucial decisions startups have to make to succeed?

One of the most crucial decision startups have to make is: either be as notorious and emulate Apple or be anonymous and emulate Micron (Most technology companies over the past 20 years, in fact, have lived lives of relative obscurity).

Other important decision is if your startup wants to control the customer experience and relationship, potentially leading to increased revenue per customer and recurring subscription opportunities and if you will open up your platforms to third parties.

Alliances is a key consideration in this competitive world. You must expect that large industrial conglomerates or IT Big Vendors that have been around for decades will fight to avoid their fast food chain going to switch suppliers because a new, untested entrant from any Silicon Valley in the world has come up with a new cloud based product or service. The opportunity to disrupt the supply chain is nil if you do not play your cards smartly.

I do not forget about the things or service “IoT enabled” that your startup is developing. Many of these things are easy to develop so you do not have a real strength. But design and develop robust, scalable industry system “IoT Enabled” is tough. By concentrating on a horizontal, embedded technology stack, new startup companies can compete more effectively and expand the market and the same time. Do no reinvent the wheel.

Be alert of the market. There is not reliable demand predictions that guarantee if your product will sell hundred, thousands or millions or if will get absorbed into smart phones or if your IoT service will be bundle for an aggregator.

Continuous innovation, customer satisfaction and use external advisors services for areas that are not key or you do not have the right skills insight.

Conclusion

Although many IoT startups are appearing worldwide most IoT hardware entrepreneurs come from universities and laboratories. They have been developing Arduino or Raspberry Pi hardware and embedded software using investments coming mainly from the Public Sector. Private investors are eager to enter these startups because they believe that their engineers have the knowledge that is not easy to find out there and therefore it give them a competitive advantage. Unfortunately what I have observed is that there are not big differences in their designs and therefore most of them will disappear due to absence of experience in making large-scale scalability and robustness of their designs. Design hardware for prototype is fine but design for production consumed by thousands or millions is another history.

For startups focused on software it depends if they are focus on horizontal technology (IoT Platforms) or industry solutions. The challenge for the first is attract a great number of industry application developers to use their development tools environment and partner with M2M/IoT Service Providers (mainly Network Operators) that provide secure and robust connectivity services and can bundle IoT services with other digital services to make end users accept to pay for the bundle. The challenge for the second is that they need to either focus on building a somewhat vertically integrated “product” or focus on being an embedded background player providing services or technology for established brands.

For IoT Service Providers startups the challenge is partner with ISVs and Sensor/Device/Hardware Vendor to offer useful services to specific industries and make sure the customer experience is excellent. Low margin is inherent to IoT business models, so customer loyalty is king.

I have no doubt that many of the successful IoT startups will be acquired in 2-3 years facilitating the necessary consolidation that the industry need and unfortunately the majority will dissapear. What I hope is that the market was intelligent enough to avoid a monumental bubble that slows the adoption of IoT.

Recommendation

Many entrepreneurs, startups and investors are excited and hopeful about the opportunities they glimpse with IoT but are not willing to seek help from experts that advise them in the specific IoT challenges; support them to define differentiating factor vs rivals and guide them find the best path to success with local or global alliances.

The technical background of the founders is important but will not be enough to convince investors. The money will flow onto those companies that demonstrate a realistic strategy, reliable alliances in the ecosystem and a viable plan to execute the business model at big scale.

Startups must be experts in their field, they must know how to make hardware (e.g. sensors) and how to add value to the data from that hardware (e.g. applications). Startups should learn to focus on what they know best, rather than wasting time re-inventing the wheel.